prime brokerage business model

1、135Theambitofprimebrokersislargevariesconsiderablybetweendomesticinternationalvenues.Thestardprimebrokerbusinessmodelcontinuestobesecuredfinancing.Theprincipalriskrestswiththehedgefundclientthecollateralprovidedisutilize

2、dtoprotecttherisktotheprimebroker’sassetsloans.Partofthefinancingofhedgefundshoweverinvolvestheprimebrokerutilizingtheassetsofthehedgefundclients.Tothisendcollateralisprovidedbyhedgefunds.Thecollateralmaybecashfinanciali

3、nstrumentssecurities.Thecollateralissubjecttoaclaimbytheprimebrokerintheeventthatthehedgefund’spositionsleadtotradinglossesissubjecttotheprimebroker’sutilizationthroughrehypothecation.Theprimebrokerwillnmallynottakesteps

4、toliquidateaptfoliountilthereisadefaultfailuretoprovidesufficientmarginfthehedgefund’sloans.Themostobviousdefaultisafailuretoprovideadditionalcollateraltomeetamargincall.Theprimebrokerwillnotsufferanydirectlossesuntilthe

5、collateralprovidedhasbeenexhausted.Thehedgefundhasprincipalriskintheeventthemarketmovesagainsttheirpositionsleadstothelossofthecollateral.Theprimaryriskoftheprimebrokeristhelossoftheptfolioinexcessofthe7PrimeBrokerageBus

6、inessModelCH007.indd135CH007.indd135514107:54:48AM514107:54:48AMWhenPrimeBrokersFail:TheUnheededRisktoHedgeFundsBankstheFinancialIndustryByJ.S.AikmanCopyright?2010byJ.S.Aikman.PrimeBrokerageBusinessModel137Thevariousarea

7、sofaprimebrokeragewktogethertoprovidefullserviceincludingcapitalintroductionfinancingservicinghedgefundstradingactivitiesmonitingrisk.Thereareahostofcomplexcomplianceregulatylegalissuesthatariseintherelationshipbetweenpr

8、imebrokershedgefunds.TheprimebrokerrelationshipisgovernedbythecontractualtermsinthePrimeBrokerageAgreement(PBA)InstitutionalClientAccountAgreement(ICAA)relatedancillaryagreements.1PrimeBrokerAgreementFregulatypurposesthe

9、rearevariousdistinctionsbetweeninternationalPBAU.S.PBAICAA.Theprimebrokeragreementsmaycoverbothstardprimebrokerageincreasinglysyntheticprimebrokerage.2Thusprimebrokersmayofferleveragedfinancingondebtequityderivativescomm

10、oditiesfexotherproducts.Syntheticprimebrokerisbaseduponmarketstardderivativecontractsthataremodifiedtoparallelthesecuredfinancingofaprimebrokeragemodel.Akeyfeatureiscrossproductmarginingwhichallowsfasinglemarginpaymentto

11、bemadeondifferentproductclasses.Theprimebrokerageagreementisthestardagreementthatgovernstherelationshipbetweenhedgefundsprimebrokerslendingarrangements.Thekeycommercialconsiderationsoftheprimebrokerhedgefundrelationshipa

12、re:●Rates●Fees●Leverage1Theancillaryagreementsmayincludemarginagreementslockupagreementsothercustodyaccountagreements.2Inthecaseofsyntheticprimebrokeragederivativesareutilizedtoprovide“synthetic”exposureswithexchangetrad